When a partner retires (i.e.) leaves the firm and the others partners are left to continue with the business then the retirement marks the end of one partnership and the start of a new one.
The partner who is leaving should be paid all the amounts due to him. This includes:
- Capital balance
This will be all the amounts the partner has invested in the firm. Some firms may not be able to refund the amount in full and therefore it may be transferred t o a loan account whereby interest will be paid on the balance.
Because this partner contributed to the improvement (existence) of the partnership therefore it will be fair to pay him his share of the goodwill. Goodwill is introduced to the accounts in the old profit sharing ratio ((i.e.) credited to all the partner’s capital accounts in the old profit sharing ratio), then written off from the accounts by debiting the capital accounts of
the remaining partners in the new profit share ratio.
- Credit balance on the current account
This amount due to the partner is paid directly from the cashbook or transferred to the Capital account whereby the total cash payable is to be determined. The transfer is made by:
Dr. Current account
Cr. Capital account
- Share of profits
If the retirement takes place during the financial period, then the retiring partner is entitled to take profits made up to the point of retirement. Any interest of capital, salaries and balance of profit shared in profit share ratio will be credited to the partner’s current account. Therefore the profit and loss account will be split between the two periods and appointment of profits done and this will be based on the terms of the partnership in each period.